The Liberty Guardian » euro

Global Debt Crisis: The Killing of Paper Money

M.J. Harris — Wed, 03 Mar 2010 01:33:29 +0000

Everyone says the euro is falling apart…that Europe itself can’t survive as a political unit.

Europe seems to lack the things that make for a strong political system. It has no common language, for example (there are more than 200 different languages in Europe). And it has no common culture either…or even a common religion…or a common race.

The Greeks are rioting in the streets. They’re upset because their government is trying to cut back on ‘services.’ Actually, it’s not the services that anyone would miss. It’s the money. The rioters are mostly people who live, in one way or another, at the expense of others…thanks to the government. They work for the government…or get handouts from it.

The poor Greek government is stuck. As in almost all other democracies, politicians bought votes by giving out jobs and money. This leads to a bidding war…in which political parties vie for favor with the voters by offering more and more “services.” One gives away bread. The other prefers circuses. Whether it is food stamps or foreign wars…the price is high. And eventually, the bids go beyond the capacity of the economy to pay them.

Greece is at that point. So are half the US states. They’re out of money. It’s “doomsday” in Illinois, says one headline. It’s a “state of emergency,” in New Jersey.

Lenders don’t want to give them any more money. Wisely, they worry they won’t get paid back. So, lenders demand higher interest rates to cover their increased risks…which puts the Greek budget even further in the red.

The Greeks think the Germans should come to their aid. Why? Because, in a way, it was the Germans who got them into this mess. Nobody would have lent so much money to the Greeks had it not been for the strong teuton-backed euro…and the implicit promise that if the Greeks got into trouble…which everyone knew they would…the rest of Europe would come to their aid.

Well, what do you know? The Greeks are in trouble. And the Germans don’t want to come to their aid. The Germans saved. They ran their own economy better. They are one of the few countries in Europe that is living, almost, within the terms of the treaty they all signed, in which they agreed to keep deficits below 3% of GDP. The German deficit is just a little more than 3%. The Greeks don’t even come close – with a deficit of 12.7%.

In America, the situation is a little different. The economy and the population are more homogenous. And much more of the money is in the hands of the central government. The Germans don’t see why their savings should be used to bail out the Greeks. They’ve got their economy. The Greeks have theirs. In the US, while there are regional differences, there is basically one economy…with one government that messes it up for everyone.

Is the US better off? Does central planning on a larger scale make the US dollar or the US economy stronger?

In fact, the looseness of the European experiment is a strength, not a weakness. What damages a paper currency is not an act of omission; it’s an act of commission. Neglecting to provide more cash and credit is not what kills paper money; on the contrary, it’s the willingness to provide unlimited amounts of it. So far, the Americans are. The Europeans – or at least the Germans – are not.

So, we’ll bet on the euro over the long term…both the euro and the dollar are “elastic” currencies. They both get stretched out of shape. But there are more people pulling at the dollar than the euro.

In the short run, anything could happen. There are probably more reasons for the dollar to go up than for it to go down. But in the long run, our money is on the euro.

Regards,

Bill Bonner
for The Daily Reckoning

PIGS Boost The Dollar But Americans Forget To Feed The Piggy Bank

M.J. Harris — Tue, 16 Feb 2010 20:23:39 +0000

by MJ Harris

The latest numbers show that the US trade deficit had widened again this month. Instead of Americans spending less and saving more so that the trade deficit can shrink, the government is encouraging more spending so the trade deficit is actually expanding.

There is still alot of uncertainty surrounding the Greece and the Eurozone ‘PIGS’ bailouts. (This is how the financial markets are refering to the heavily-indebted countries of Europe: Portugal, Ireland, Greece and Spain.) Causing temporary flight back to the dollar. Bringing it to its highest levels in several months. These bailouts are bad for the economy as a whole because it promotes reckless behavior and rewards those who took on too big risks, with no regard for consequences.

This also sends messages to surrounding countries that they don’t need to reign in their risky behavior as well because no matter what happens they will be able to get bailed out.

“The problems we see in Europe will be coming to the United States soon at the state levels.”

Senate Candidate Peter Schiff recently said in an weekly podcast “In the end the federal government will come to the rescue with bailouts and that is going to lead to more reckless spending and even more risky lending by institutions because they feel like they will eventually get bailed out themselves.”

We know that the federal government is approaching bankrupt as well, as it continues to raise the federal deficit ceiling.

While the dollar has seen a temporary boost while others countries are in a state of panic, there is still a day of reckoning coming for the US dollar. We have been borrowing more and more money, however we aren’t spending money on productive things. Instead the majority of money is “blown” away in the middle east, while the rest is sucked down the drain of endless pension benefits for people who are no longer working.

The artificially high levels of the dollar have provided a great opportunity to buy gold. Just a few months ago gold was breaking records every week. Now it has pulled back off of those new highs, providing a good price to buy more. The new strength in the dollar should be short lived because Washington continues to run the printing press around the clock. Which will eventually create another round of new highs for gold in the years to come.

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The Worst May Not Be Over for Europe

M.J. Harris — Sat, 02 Jan 2010 01:02:03 +0000

LONDON — Never before has Europe’s monetary union seemed so fragile.

Day by day, fears are growing that Greece or another weak country may default on its sovereign debt obligations, forcing the richer countries in Europe to ride to the rescue or risk having one or more of its most vulnerable members leave the 16-nation euro zone.

Many European economists discount such a fracture as a remote possibility. But that doesn’t mean Europe has safely emerged from crisis.

Instead, it faces a longer-term challenge to restore the fiscal credibility of at least half the countries that use the euro. The true test for the world’s largest common currency zone, analysts say, will be whether it can withstand the economic, political and social strains once the European Central Bank begins to raise interest rates in response to economic improvements in Germany, France and other Northern European countries.

At that point, the laggards on the union’s fringe — Portugal, Ireland, Italy, Greece and Spain (the so-called Piigs) — will face even tougher choices to cope with what looks like several more years of stagnant economies, high unemployment and gaping budget deficits.

“If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation,” said Jordi Galí, a Spanish economist recognized for his work on business cycles who heads the Center for Research in International Economics in Barcelona. “Such an asymmetric recovery is pretty likely, and if the E.C.B. raises rates, it could get very ugly.”

Mr. Gali, like a number of other European experts, takes the view that the euro zone’s resilience has been underestimated. He says the recent convulsions are more the result of trigger-happy ratings agencies that have downgraded the sovereign debt of Greece and others in atonement for having failed to foresee the subprime mortgage crisis.

Still, he says, there is no escaping this emerging growth divide, and he points out that the mandate of the European Central Bank is to ensure broad price stability in the union, not to look out for the interests of individual nations.

France and Germany have already emerged from the recession. Business confidence in Germany, Europe’s largest economy, has hit a 17-month high.

Yet on the periphery, the hangover from more than five years of a credit-infused boom shows little sign of diminishing.

Ireland, the first economy to stumble, has taken the most severe fiscal action, cutting public wages sharply. A new Greek government, punished by the rough treatment of bond investors no longer willing to countenance soft promises of reform, is just now promising steep spending cuts. But it is not clear whether the political system in Greece will accept them.

Meanwhile, Spain, to the frustration of many major lenders, seems to be putting off difficult fiscal questions in the hope that its economy will soon recover.

Critics of the euro zone contend that weak governments in the peripheral economies, facing high unemployment and restive voters, will not have the stomach to hold down wages, pensions and public expenditures.

“Are these people serious about reform, or are they just telling people what they want to hear?” asked Edward Hugh, a British-trained macroeconomist who lives in Barcelona and has been critical of Spain’s unwillingness to take difficult economic decisions.

Paradoxically, the very dysfunction of a struggling two-tier Europe may represent the best chance for recovery if it leads to devaluation of the euro against the dollar, which many see as long overdue.

Already, in the last month, the euro has lost more than 5 percent of its value against the dollar. Many economists predict that the currency will weaken more as the growth gap between the core and peripheral states creates further disharmony.

Then, it will be the type of export-led recovery that has helped the United States and is likely to soon help Britain that could bring Europe’s economies closer to convergence.

“If there are fears now that a breakup of the euro zone will lead to weakening of the euro, then that is good news,” said Paul De Grauwe, an economist based in Brussels who advises the president of the European Commission, José Manuel Barroso. “So we should congratulate Greece for getting us out of this anomaly of having a euro that is too overvalued.”

Any such recovery will not be rapid, however. In Ireland, where prices are falling by 5 percent, reordering the economy from its deep reliance on construction and property will take years. And an already unpopular Irish government, along with others on Europe’s periphery, will have a difficult time explaining to recession-bruised voters why they must accept an central bank’s decision to raise interest rates — a move that may protect German and French savers from inflation but that does little for the many millions of citizens out of work.

Yet the painful, historic steps taken by Ireland offer a ray of hope, says Philip Lane, a professor of international macroeconomics at Trinity College Dublin who oversees the widely read Irish Economy blog.

He points to signs of wage compression in the hard-hit service, property and government sectors as proof that there is a recognition that recovery, distant as it may seem, must occur inside the euro zone, not outside.

“It takes a crisis to learn a lesson,” Mr. Lane said. “Could it be that by getting countries to change their behavior you might get improved cooperation within the euro zone?

“What does not kill you,” he added, “often makes you stronger.”

via: NY Times